Establishing a Due Diligence File

resource edge TM Establishing a Due Diligence File investment insights practice building solutions retirement resources

RESOURCE EDGE TM Table of Contents 3 Introduction 4 401(k) fiduciary documentation checklist 7 Sample fiduciary meeting agenda 9 Documentation record: Attendance sign-up sheet 10 Documentation record: Education meetings 11 Documentation record: Participant communications 12 Technical reference guide

Establishing a Due Diligence File The Internal Revenue Code (the Code) and The Employee Retirement Income Security Act of 1974 (ERISA) are the two primary laws that govern 401(k) plans. The Code is the law that authorizes qualified retirement plans and provides for their tax benefits. ERISA is designed primarily to protect the rights of participants and beneficiaries and governs the management of retirement plans. ERISA contains many of the same requirements found in the Code, and it also addresses issues such as fiduciary responsibilities, reporting and participants right to disclosure. Two of the primary fiduciary requirements under ERISA include the following: 1) a fiduciary shall discharge his or her duties with respect to a plan solely in the interest of the participants and beneficiaries; and 2) fiduciaries must carry out all duties with the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use. These rules, commonly referred to as the exclusive benefit and prudent person rules, would apply to all aspects of managing a retirement plan including selecting and monitoring investment alternatives, and assessing the performance and service levels of outside providers, etc. At any time, fiduciaries may be asked to demonstrate that their conduct meets these standards. One of the best ways to demonstrate compliance with these standards and answer any potential investigations by the Department of Labor or the Internal Revenue Service is to maintain a comprehensive due diligence and documentation file. Without thorough documentation, the plan s fiduciaries may be challenged to demonstrate the prudent basis for their decisions and actions, and compliance under both laws. The sample checklist, meeting agenda items, and forms contained in this guide are not intended to be an exhaustive list for documenting actions, etc., but rather the basis for establishing a due diligence file. Plan sponsors should work with their service providers, advisors and attorneys in establishing their comprehensive due diligence file. Some of the items on the checklist may be automatically retained by the plan s service provider. Fiduciaries should ensure that they have access to the information if they decide to switch to a new provider. 2

RESOURCE EDGE TM 401(k) fiduciary documentation checklist Fiduciaries should follow a well-defined procedure for fulfilling their fiduciary responsibilities and keep a well-documented due diligence file. The following checklist serves as the basis for establishing a comprehensive due diligence file. This information is intended to be general information on the subject of fiduciary responsibility. It is not intended to be used as a legal opinion, or serve as legal or investment advice. Please consult an attorney for specific guidance on all fiduciary issues. Brief descriptions of several technical terms used in this fiduciary checklist can be found on page 12 of this brochure. Plan Documents and Records Plan documents including all amendments Plan Adoption Agreement (if applicable) IRS determination letter and filing package (if applicable) Summary Plan Description (SPD), including all amendments (record of distribution to participants) Summary of Material Modifications, in lieu of SPDs (record of distribution to participants) Loan Policy, if separate from plan document Forms 5500 and schedules Audit reports/statements (if applicable) Annual nondiscrimination tests (all that are applicable) Actual Deferral Percent test under 401(k) (ADP) Actual Contribution Percent test under 401(m) (ACP) Annual additions limit under 415 Top Heavy Determination under 416 410(b) Minimum Coverage test 401(a)(4) nondiscrimination test if the plan provides for employer contributions other than matching contributions Annual test to determine the limit on tax deductible contributions under 404 Determination that benefits, rights and features under the plan are nondiscriminatory under 401(a)(4) Summary Annual Reports (record of distribution to participants) Board resolutions authorizing profit sharing contributions, plan amendments, etc. Trust documents (if separate from plan document) including all amendments and trustee reports Trustee statements Contracts or service agreements with the provider, third party administrator, consultant, advisor or any other service provider to the plan Fidelity Bond to comply with ERISA 412 Fiduciary liability insurance policies (if applicable) Service provider insurance policies (i.e., Errors and Omissions, etc.) or a certificate of insurance evidencing such coverage Documentation on any Voluntary Fiduciary Correction Program (VFCP) filings and/or Employee Plans Compliance Resolution System (EPCRS) filings 3

Other Notices to Participants and Forms (as applicable) Notice of blackout/lockdown periods (as required under the Sarbanes/Oxley Act) Explanation of distribution options and special tax payments Notices of Designed-Based Safe Harbor Notice of Qualified Pre-Retirement Survivor Annuity to the qualified joint and survivor annuity rules of 417 Automatic Enrollment/Default Investment Notice Catch-up Contribution Election Form, etc. Cross-Tested Plans Contribution Notice Notices regarding plan changes (investment options, changes in notice providers, new regarding plan services, etc.) Forms: Distribution, Withdrawal, Loans, Participant Election/Authorization Form, if the plan is subject Participant Investment Election Form, Beneficiary Designation Form, Age 50 Participant Fee Disclosure Notice S 404(a)(5) Service Provider Fee Disclosure Notice 408(b)(2) Meeting minutes from plan fiduciary meetings SAS 70 report from the administrative/recordkeeping provider Documentation demonstrating compliance with ERISA 404(c) (if applicable) Qualified Domestic Relations Orders procedures and sample forms, notices, letters (and copies of QDROs received if not retained by the service provider) Copies of Forms 1099-R, 1096 and 945 filed with IRS (if not retained by the service provider) Payroll summary or register showing all employee contributions (payroll deductions for each pay period) and evidence of receipt of these monies by the plan s trust Investments Investment Committee charter describing the responsibilities and powers of the committee (if applicable) Investment Policy Statement (IPS), including amendments/modifications If the plan does not have an IPS, documentation on the plan investment guidelines, including but not limited to: evaluation of the specific investment needs of the plan s participants, including the assessment of employee demographics age, investment knowledge, etc. standards and benchmarks of investment performance to which the plan s investments are compared classes of plan investments authorized styles of investments authorized restrictions on investments guidelines relating to a self directed brokerage option or mutual fund window investment objectives and goals of the plan Description of all investment options, including investment objective, fees, risk and return characteristics Prospectus /Investment Summary Profile or other disclosure materials relating to the plan s investment options Documentation on the analysis, comparison and selection of additional investment options, or the replacement of investment options Periodic investment reports from the service provider or advisor Documentation on periodic investment reviews conducted by fiduciaries/investment committee, including minutes from any meetings discussing the investment options Acceptance of fiduciary status by a service provider or investment advice provider(s) (if applicable) 4

RESOURCE EDGE TM Service Provider Selection Documentation on the specific criteria used to select a provider All information relating to the identification, consideration and selection of administrative service providers considered for providing services to the plan, including: Requests for Proposals (RFP) Service Provider responses to the RFP Follow-up questions to the providers and responses to such questions Analysis and comparison of services, investments and fees Minutes of all meetings discussing potential providers All correspondence with service providers Documentation on the final decision to select a service provider If a formal RFP process was not conducted, all documents relating to the investigation, comparison and selection of a service provider and investment options for the plan Communications and Education A description of all educational meetings or seminars provided to participants Education meeting (see sample) Attendance sheet (see sample) Copies of presentations Other materials/handouts provided at the meetings Communication materials, newsletters, etc. from the plan sponsor and/or plan administrator/provider to participants (see sample) Sample participant account statement Enrollment kit and other documentation provided to new eligible employees Fees Documentation on the payment of fees and expenses: Plan administration fees paid out of plan assets or by the plan sponsor Participant fees deducted from participant accounts Investment management and related fees Transaction based fees Documentation on the review of service provider fees and determination of reasonableness. The various fees to document may include, but are not limited to: legal, audit, participant recordkeeping, compliance and government reporting, conversion, communications and education, participant advice, investment management, trustee, participant loans, participant/beneficiary payments, advisory, 12b-1 fees, sub-transfer agent fees, variable annuity wrap fees, surrender and transfer charges, etc. 5

Sample Fiduciary Meeting Agenda Open Meeting Record date and attendance Old business Review and approve final minutes from the previous meeting Provide updates on open items from the previous meeting Obtain approval of previous meeting minutes from attendees New business Plan design Review any legislative changes that may affect the plan Review Department of Labor or Internal Revenue Service rulings that may impact the plan Discuss current plan design and any potential changes that may better meet the needs of employees and the company s objectives Review any amendments adopted by the plan since the previous meeting Investments Review the investment policy statement or designated investment criteria. If no statement exists, review the criteria for which investments will be measured and evaluated. These may include: Portfolio manager tenure Consistency of investment objective style drift/changes Competitive and consistent performance against an appropriate benchmark Investment management fees reasonable and competitive Review plan investments against the Investment Policy Statement or the designated investment criteria Record concerns/issues with any investments and the action taken (i.e., investment(s) placed on a watch list, additional information is requested from the investment manager(s), etc.) Discuss any additions to the investment lineup, or replacement of investments that have fallen outside the investment guidelines. Determine the process and guidelines used for selecting new investments. Review plan asset allocation Review participant investment utilization reports (if available) Communications and education Summarize enrollment and all educational meetings held since the previous meeting Determine future educational programs and implementation schedule Review written communication programs and materials provided to participants since the previous meeting Discuss and determine future communication efforts 6

RESOURCE EDGE TM Sample Fiduciary Meeting Agenda continued New business Plan administration Review administrative services and performance standards Review service provider fees Review all other service providers and related services and fees Review Department of Labor or Internal Revenue Service rulings that may impact the plan Discuss any new services introduced since the previous meeting, and any new services that are expected to be introduced in the future Review compliance with ERISA 404(c) (if applicable) Review compliance with ERISA 408(b)(2), reasonableness determination Close Review open items and the individual responsible for follow-up Obtain approval of all action items from attendees Complete written documentation of the meeting minutes and distribute a draft to all fiduciaries, other attendees and non-attendees File the draft minutes and documentation in the due diligence file until final approval at the next meeting This information is intended to be general information on the subject of fiduciary responsibility. It is not intended to be used as a legal opinion, or serve as legal or investment advice. Please consult an attorney for specific guidance on all fiduciary documentation issues. 7

Attendance Sign-Up Sheet: Documentation Record Plan Name: Date: Topic: Name (please print) Signature 8

RESOURCE EDGE TM Education Meetings: Documentation Record Plan Name: Meeting date Topic(s) Employee group (1) presentation material (2) Source of 6/1/2012 Enrollment presentation plan features, investment options, enrollment instructions, etc. All new hires from the previous quarter eligible to enroll Copy filed Service Provider John Doe presented 3 (1) EMPLOYEE GROUP description of the participant or employee group invited to the meeting if sent to a targeted group. (e.g., nonparticipants, newly eligible employees, etc.). (2) SOURCE OF MATERIALS e.g., internally created, service provider, advisor, etc. 9

Participant Communications: Documentation Record Plan Name: Meeting date Topic(s) Employee group (1) presentation material (2) Source of 6/1/2012 Quarterly Newsletter All participants and terminated employees with balances Created internally Copy filed 3 (1) EMPLOYEE GROUP - description of the participant or employee group that received the materials if sent to a targeted group (e.g., all participants age 50 and older, nonparticipants, etc.). (2) SOURCE OF MATERIALS e.g., internally created, service provider, etc. 10

RESOURCE EDGE TM Technical Reference Guide Technical terms common in the administration of retirement plans. This guide lists brief descriptions of several technical terms used in the fiduciary documentation checklist found on page 4 of this brochure. Plan Documents and Records Plan document Determines the provisions of the plan. A plan document is required, for all qualified retirement plans. There are three types of plan documents: 1) Master or prototype plan contains/provides documents that have been approved by the National Office of the Internal Revenue Service (IRS). These documents include a Plan Adoption Agreement (see below). 2) Volume submitter plan a single plan document that has been preapproved by the IRS. 3) Individually designed document - a customized document for the plan sponsor, which must be submitted to the IRS for approval. Plan adoption agreement Prototype documents are accompanied by the plan adoption agreement that contains individual choices for the plan sponsor. Typical choices include vesting schedule, deferral percentage limitations, eligibility requirements, matching contributions, loan, withdrawal and distribution provisions, etc. IRS determination letter and filing package A letter issued by the IRS that states whether a submitted plan meets the tax qualification requirements of the Internal Revenue Code. Generally, plan sponsors can obtain a determination letter from their service provider if a prototype or volume submitter plan document (see above) is used. An individually designed plan document needs to be submitted to the IRS by the plan sponsor, or their legal representative, in order to receive a determination letter. Summary Plan Description (SPD) All plans are required to provide participants with a summary plan description that describes the plan in plain English. SPDs must be provided within 90 days of eligibility, every five years if amendments have been made, and every 10 years regardless if no amendments have been made. Regulations include specific format, timing and content requirements. Summary of Material Modifications (SMM) When a plan sponsor makes amendments to the plan s provisions that would modify the SPD, an SMM must be provided to participants describing the change. Regulations include specific format, timing and content requirements. Loan policy The loan policy sets forth all of the requirements for obtaining plan loans and may be separate from the plan document so that changes to the loan provisions would not require a plan amendment. A participant loan must meet certain requirements of the Internal Revenue Code and ERISA. Form 5500 and Schedules Annual Return/Report of Employee Benefit Plan; filed with the IRS. Audit reports/statements All plans over 100 participants are required to have an annual audit. The audit requirement is waived for small plans (under 100 participants) if certain disclosure, investment and bonding requirements are satisfied. 11

Annual nondiscrimination tests the purpose of nondiscrimination rules and tests is to limit the extent to which plan sponsors may maintain a plan that exclusively or primarily benefits only highly compensated employees. Actual Deferral Percentage test (ADP) an annual test of the average deferral rate of highly compensated employees compared to the average of non-highly compensated employees. Various methods are available to correct a failed ADP test. Actual Contribution Percentage test (ACP) an annual test of the matching contributions for highly compensated employees compared to the average of non-highly compensated employees. Various methods are available to correct a failed ACP test. Top heavy determination a plan is top heavy if the aggregate of all accounts of key employees exceeds 60% of the aggregate of all accounts of all employees on the last day of the prior plan year. The definition of key employees is based on their officer, compensation, and/or ownership status. A top-heavy plan must make a specific employer contribution and adopt specific vesting schedules for non-key employees. Top heavy plans are most common in smaller plans. 410(b) minimum coverage test minimum coverage rules require the employer to make the plan available to a cross section of employees. There are two types of tests: Ratio percentage test The percentage of NHCEs (non-highly compensated employees) benefiting under the plan must be at least 70% of the percentage of HCEs (highly compensated employees) benefiting under the plan. Average benefits test an alternative test used if the plan does not pass the ratio percentage test. 401(a)(4) nondiscrimination test ensures that highly compensated employees are not receiving a greater benefit than non-highly compensated employees in terms of contributions, benefits, rights and features under the plan. 415 test also referred to as the annual additions test, which ensures that all contributions (e.g. deferrals, matching contributions, profit sharing contributions, etc.) do not exceed the 415 limit for each participant. The IRS may increase the limit each year. Annual test to determine the limit on tax deductible contributions under 404 documentation to demonstrate that the employer s tax deductible contributions (excluding salary deferrals) do not exceed 25% of participants eligible compensation. Summary Annual Report (SAR) A report that summarizes the plan s latest annual report on Form 5500. The SAR must be provided to participants on an annual basis. Board resolutions The terms of the plan document will determine which actions need approval by the plan sponsor s board of directors (such as plan amendments, amount of employer contributions, etc.) Copies of board resolutions are usually required for the plan s yearly audit. Fidelity bond Every fiduciary of a plan and every person who handles funds or other property of the plan (except a bank or insurance carrier) is required to be bonded. The bond coverage must be at least 10% of plan assets up to a maximum bond amount of $500,000. Fiduciary liability insurance policies A fiduciary may purchase liability insurance policies to cover financial liability resulting from a breach of fiduciary duties. 12

RESOURCE EDGE TM Service provider insurance policies Many service providers carry insurance policies to provide protection from losses which result from errors in their services. Voluntary Filer Correction Program (VFCP) A program established by the Department of Labor (DOL) that provides plan sponsors with a mechanism to voluntarily correct specific fiduciary violations. The Delinquent Filer Voluntary Correction Program (DFVC) also exists for plan sponsors to correct late or unfiled Form 5500s and pay a reduced, predetermined penalty. Employee Plans Compliance Resolution System (EPCRS) An IRS program under which plan sponsors may voluntarily correct plan errors or defects that would raise tax disqualification issues. EPCRS includes the Self-Correction Program (SCP), the Voluntary Correction Program with IRS Approval (VCP), and the Audit Closing Agreement Program (Audit CAP). Other Notices Notices of blackout/lockdown periods Plan sponsors are required to inform participants of any period where participants may not have access or the ability to transact in their accounts/investments (i.e., make investment changes, take loans, withdrawals or distributions). These periods most commonly occur during a conversion process when a plan sponsor transfers the plan from one service provider to another. Explanation of distribution and special tax notice regarding plan payments Plan sponsors are required to provide a notice to participants explaining the direct rollover provisions and other special tax rules regarding distributions from a plan. Notices of design-based safe harbor This notice is only required for plans that adopt the safe harbor provisions in order to avoid the ADP and ACP nondiscrimination testing. The notice is required between 30 90 days before the beginning of each plan year and informs the participants of the amount of the safe harbor contribution for the following plan year and other required information. Newly hired employees must also receive this notice before they become eligible to participate in the plan. Cross-tested plans contribution notice The employer must provide the trustee with a written notice at the time of the contribution specifying how the plan is to apportion the contribution among the allocation groups. Notice of Qualified Pre-Retirement Survivor Annuity (QPSA) This notice is only required for plans where the normal/default form of distribution is in the form of a qualified joint and survivor annuity. For plans that have this provision, the participant often waives this form of distribution and elects another form, such as a lump sum distribution. If married, the participant s spouse must consent to the waiver. Automatic enrollment/default investment notice Initial and annual notice of participants rights to cancel or change the contribution rate and how contributions are invested in the absence of an affirmative election. SAS 70 reports Statement on Auditing Standards (SAS 70) is an internationally recognized auditing standard which represents that a service organization has been through an in-depth audit of their control activities, which generally includes controls over information technology and related processes. Annual participant fee disclosure notice - A plan administrator must provide to each participant or beneficiary certain plan-related information and certain investment- 13

related information on a regular and periodic basis. The disclosure must contain an explanation of any fees and expenses for general plan administrative services, and any fees and expenses that may be charged to or deducted from the individual account, and historical investment and benchmark performance. Investment-related information includes an Internet Web site address and must be furnished in a chart or similar format. A general glossary of terms to assist participants and beneficiaries in understanding the plan s investment options, or an Internet Web site address that is sufficiently specific to provide access to such a glossary. Annual service provider fee disclosure notice - A covered service provider must provide the following basic written information including a description of the services to be provided, a statement of whether the service provider will provide any services as an ERISA fiduciary, a description of all direct and indirect compensation reasonably expected to be received, and the manner in which compensation will be received. Recordkeepers and brokers who make designated investment alternatives available must provide basic fee information for each designated investment alternative. The information should include a description of the expense ratio, transaction fees (e.g., loads, redemption fees), and any other ongoing fees in the designated investment alternatives. Investments Investment committee charter Describes the responsibilities and powers of the investment committee. This may be contained in the Investment Policy Statement. Investment Policy Statements (IPS) A formal statement governing the selection and monitoring of plan investments. If no IPS, documentation on the plan investment guidelines Any information that describes the criteria that the plan sponsor or advisor uses to evaluate and select the investments for plan participants, and the criteria that the investment options are measured against during the periodic review of the plan s investment options. Documentation on the analysis, comparison, and selection of additional investment options or the replacement of investment options A description of how the plan sponsor arrived at the decision of adding or replacing any investment option. Periodic investment reports from the service provider or advisor These reports may include, but are not limited to, fund fact sheets, historical performance charts, investment style analysis, plan asset allocation charts, participant transaction summaries, capital market overviews, etc. Acceptance of fiduciary status by a service provider or investment advice provider(s) Any contract or document that states a service provider to the plan acknowledges acceptance of fiduciary responsibility for services provided to the plan (sometimes referred to co-fiduciary responsibility). Generally, these services relate to selecting and monitoring investments for the plan. In addition, some investment advice providers accept fiduciary responsibility and indemnify the plan sponsor for any losses resulting from the advice given to individual participants in the event of a participant lawsuit. Program (SCP), the Voluntary Correction Program with IRS Approval (VCP), and the Audit Closing Agreement Program (Audit CAP). Source: The ERISA Outline Book, by Sal Tripodi, J.D., LL.M. This information is intended to be general information on the subject of fiduciary responsibility. It is not intended to be used as a legal opinion, or serve as legal or investment advice. Please consult an attorney for specific guidance on all fiduciary documentation issues. 14

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